|June 4, 2014|
Previously published on May 30, 2014
March saw the introduction of a series of new enforcement tools in OSC Staff Notice No. 15-702, which includes criteria for “no-contest” settlement agreements and “no-enforcement action” agreements. These agreements mean that some respondents to enforcement proceedings will, upon payment of a monetary penalty and a promise to do better next time, avoid admitting guilt.
The goal of this relaxation of the rules is to promote better self-enforcement. As a general principle, the OSC will not give credit for cooperation to market participants who put their own interests ahead of their obligations to clients, shareholders, or the “integrity of Ontario’s capital markets” in the context of an investigation. The Staff Notice includes a list of behaviours which unsurprisingly disqualify one from getting credit for cooperation, including misrepresentation of the facts, destruction of documents, failing to honour undertakings to provide information, and unreasonable delay. Parties who are candid at an early stage with the OSC, make full disclosure, and correct irregularities stand the best chance of escaping sanction.
Is Relying on Legal Rights Uncooperative?
However, the Staff Notice reveals the OSC views a certain type of activity— relying on one’s legal rights — as being a form of uncooperative behaviour. Specifically listed in the types of activity that will disqualify a market participant from receiving a credit is “indicating they are prepared to cooperate fully but will only provide information on a compelled basis” which is necessary to avoid self-incrimination and “invok[ing] legal advice as a defence, but refus[ing] to disclose the advice,” which suggests the Regulator has a dim view of solicitor-client privilege. Also included in the list is “claim[ing] a privilege to avoid providing details of potential breaches of Ontario securities law.”
In this regard, the OSC has perhaps misconceived this initiative. Requiring a summons and compelling testimony is an important safeguard against overly broad investigations founded on rumour or speculation. Many investigations start with an irregularity in filed paperwork, a whistleblower, or a complaining client of the regulated party, which can be simply a disgruntled investor who has lost money for legitimate reasons, but is understandably angry about it. Although the OSC greets complainants with an appropriate scepticism, the possibility for an ill-founded investigation remains a risk that compulsion, with all of its protections against self-incrimination, helps mitigate. The issue of privilege and reliance on legal advice is a worse complaint for the OSC to be making. Undoubtedly, enforcement Staff hear market participants rely on legal advice to explain behaviour regularly. Rarely, if ever, should the OSC need to verify the substance of that advice. The OSC are perfectly capable of evaluating the legal merits of a respondent’s situation. If opinions differ, prosecution is an option. Market participants should not be required to buy legal advice for the regulator’s benefit.
If credit is granted, Staff may decide to recommend that the matter not proceed as a prosecution pursuant to the regulator’s powers under s. 122 of the Securities Act, enter into an Executive Director settlement as permitted, place terms on the respondent’s registration, possibly issue a penalty, and obtain undertakings from the respondent to improve its compliance. The Staff Notice contemplates that even less than these steps may be taken (i.e. simply concluding the matter), or more (issuing a Notice of Hearing and Statement of Allegations which describes the good conduct deserving of credit). As would be expected, the potential courses of action are highly discretionary and will require the respondent’s counsel to negotiate without any certainty as to the eventual outcome.
It would be unusual, in all circumstances but the most banal regulatory infractions, for one’s lawyers to recommend complete cooperation with the regulator, on its timeline, without a commitment as to the consequences of such openness. Penalties at the OSC are, by and large, proportionate to the regulatory infraction. That system has developed on a foundation of caution. Reserve on the part of the respondent is not always a sign that there is, necessarily, “something to hide”. It is also a tool of protecting confidentiality and restraining a bureaucratic exercise. The OSC knows this, and should respect it. A better approach would be a complete sliding scale, in which an extremely high degree of cooperativeness, involving the waiver of legal rights, leads with certainty to a lessened penalty.
OSC’s New Enforcement Tools: A Move in the Right Direction
In civil matters, settlement is the normative outcome of litigation; an overwhelming majority of cases end in settlement or withdrawal of the claim. In criminal matters, “settlement” does not exist. The Crown withdraws charges with some regularity, but the circumstances behind such a decision vary widely. Plea negotiations are widely used, but precise statistics as to the frequency with which guilty pleas are discussed in advance are unavailable. The interests of the parties drive the process: private parties in civil litigation make economic decisions about the prospect of recovery, balanced against the costs of proceeding and the prospect of losing. In criminal cases, the Crown has an interest in law enforcement and defendants might have their liberty in jeopardy. These higher stakes result in a smaller window for a negotiated resolution -- the parties might simply need to win.
Regulatory matters, such as proceedings before the OSC, fall into a middle category of interest-based decision-making, hewing much more closely to the criminal than the civil. The OSC has jurisdiction over very serious issues involving dishonest conduct, but also focuses on what a lay person might see as more mundane regulatory and administrative matters. These are no less important in ensuring the fair operation of Ontario’s capital markets, but involve circumstances where, simply put, less is at stake. Recognizing that the public interest, which is the primary preserve of the OSC, is not always advanced by requiring a mea culpa is a move in the right direction. Recognizing that the exercise of a respondent’s legal rights is not contrary to the public interest is, apparently, not yet as clearly understood.